Is Shenzhen Bromake New Material (SZSE:301387) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shenzhen Bromake New Material Co., Ltd. (SZSE:301387) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen Bromake New Material's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Bromake New Material had debt of CN¥163.5m, up from CN¥19.3m in one year. However, its balance sheet shows it holds CN¥596.6m in cash, so it actually has CN¥433.1m net cash.

How Strong Is Shenzhen Bromake New Material's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Bromake New Material had liabilities of CN¥578.1m due within 12 months and liabilities of CN¥94.2m due beyond that. Offsetting these obligations, it had cash of CN¥596.6m as well as receivables valued at CN¥596.0m due within 12 months. So it can boast CN¥520.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Bromake New Material could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shenzhen Bromake New Material has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Shenzhen Bromake New Material

In fact Shenzhen Bromake New Material's saving grace is its low debt levels, because its EBIT has tanked 71% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Bromake New Material's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shenzhen Bromake New Material may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Shenzhen Bromake New Material saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Bromake New Material has net cash of CN¥433.1m, as well as more liquid assets than liabilities. So while Shenzhen Bromake New Material does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Shenzhen Bromake New Material you should be aware of, and 1 of them can't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.